Rebuilding capacity: Understanding professional indemnity insurance

Capacity-building is the process of developing and strengthening skills, instincts, abilities, processes, and resources which are required by collectives and eco-systems to survive, adapt and thrive in an everchanging, fast paced world.

In many ways it seems we often cannot keep up with a constantly evolving world and feel the effects of overwhelm and burn-out. Our capacity then becomes more limited than ever, which is exactly what has happened to many individuals, and industries, over the pandemic years. Capacity, tolerance and resilience are low, and now is the time to re-build that capacity.

Australia’s construction landscape is not exempt from this shift and has significantly evolved from what it once was. Once upon a time, consultancy agreements and contracts were a mere handshake deal based on mutual understanding and trust. Agreements have evolved into convoluted documents riddled with incomprehensible clauses which can be difficult to untangle, even for the legally qualified.

Trust is diminished in the minds of construction professionals, while limiting their liability has come to the foreground, casting a dark shadow over their creativity. We are currently at a cross-roads of an ever-changing world, coming out of a pandemic and faced with the greatest economic uncertainty of the last decade. This, combined with an insurance “hard-market” where some insurers have withdrawn or reduced their capacity for providing professional indemnity for construction professionals, has made it not just difficult but in some cases very costly for consultants to obtain professional indemnity insurance, without which their livelihoods are at stake.

Protecting the asset that is professional indemnity insurance is arguably more important than ever during this time. Professional indemnity insurance can be a lifeline to consultants, especially when faced with large claims that may greatly exceed the annual turnover of a small or medium consultancy practice. The indemnity offered by insurers means that in the event of a dispute, the insurer shoulders all or part of the financial burden of engaging a legal team and paying any damages awarded, so that the consultant can continue focusing on their work.

Understanding what professional indemnity means, and can offer, is one of the many ways consultants can re-build capacity and strengthen their skills and resources. By understanding their insurance policies and any exclusions, not just at the senior level, but from day one in their career, consultants are better informed and equipped to identify issues before they arise, both in consultancy agreements and in the day to day.

So, what is Professional Indemnity Insurance?

Professional indemnity insurance is designed to protect you and your business against claims by third parties for the loss they suffer arising out of a mistake that you have made, or are alleged to have made.

Professional indemnity insurance covers claims for breach of professional duty arising from the conduct of the business of the insured. In order to be covered by professional indemnity insurance, the claim must have been made against you, and notified to the insurer during the period of the insurance policy, which is usually one year, and the claim must arise from the conduct of the specific profession or profession(s) noted on the policy schedule. If the profession noted on your policy schedule is “architecture”, but you provide some structural engineering advice, the insurer will not cover claims arising out of the engineering advice. It’s important to consult your insurance broker before moving into new areas of business, to help you obtain the right insurance cover.

The insurer will pay any amount for which the insured has a civil liability, but only up to a maximum amount. This is called the “limit of indemnity” and is stated on the policy schedule. The insurer will also pay for reasonable costs and expenses of defending any claim (including paying for lawyers, any court fees, and other associated expenses). Some policies provide that these legal costs are included within the limit of indemnity, while others provide that they are an additional entitlement on top of the limit of indemnity. An experienced insurance broker can explain the difference and help you obtain the best cover available to you.

Please note that all professional indemnity policies are different and will provide different types of cover.

What is a Professional Indemnity Claim?

Claims come in many different shapes and sizes, but in a nutshell, they are:

1. A claim by a third party against you

2. for any loss of damage

3. against you, wheter you have actually commited, or are allged to have committed

4. a breach of professional duty (e.g. negligence)

5. in your professional services within the insured profession.

Where do claims come from?

Claims in the construction space can come from a multitude of different places, but predominantly come from:

1. Disputes with clients;

2. Allegations from builders; and,

3. Injured persons, as a result of non-compliant buildings.

Some common causes of disputes are:

1. Drawings or plans and computations which are non-compliant with relevant laws and codes;

2. Consultants taking on projects beyond the level of their ability and available resources;

3. Non-compliant materials, including where materials have been substituted and consultants have signed off;

4. Other incorrect certification of works; and,

5. Poor communication with other parties.

The risk of these claims can be reduced, and sometimes avoided, by training staff in good habits, staying on top of changing regulations, and building good systems into your business. As the industry rebuilds capacity, it is important to cement these systems in place and make them part of your practice infrastructure, so that you and your staff can get back to the design services that are the crux of your role. And for the occasional claim that occurs despite putting all these precautions in place, it’s best to consult an experienced broker so you can be confident that professional indemnity insurance will be there to provide cover when you need it.

Vesna Koteska and Wendy Poulton

Risk Managers - informed by Planned Cover

www.informedprofessionals.com.au

www.plannedcover.com.au

This article is only general advice in respect of risk management. It is not tailored to your individual needs or those of your business, nor is it intended to be relied upon as legal or insurance advice. For such assistance you should approach your legal and/or insurance advisors.